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In a startup “Good news needs to travel fast, but bad news needs to travel faster.”

There’s something about the combination of human nature (rationalization and self deception) and large hierarchical organizations (corporations, military, government, etc.) that actively conspire to hide failure and errors. Institutional cover-up’s are so ingrained that we take them for granted.

Yet for a startup a cover-up culture is death. In a startup founders and the board need to do exact the opposite of a large company – failures need to be shared, discussed and dissected to extract “lessons learned” so a new direction can be set.

Lie to My FaceThe first time I saw a corporate cover-up was as a new board member of a medium size public company. The VP of an operating division had run into trouble in product development; the product was late and getting later. The revenue plan had the new product baked into the numbers and it was clear that this division General Manager was going to crater his forecast (happens all the time, nothing new here.) I knew this from talking to his people before the board meeting so none of this was a surprise. What was a surprise was the boldface lies the VP told us at the board meeting. “The product’s on schedule. No problems. We’ll make the numbers.” The disconnect between reality and a senior executive’s willingness to blatantly lie to his CEO and board just blew me away.

It would have been so much simpler for him to say, “We’re screwed, and I need your help.” Until I dug deeper and realized that the entire company had a “cover-up culture” – the CEO punished failure and bad news. Since only good news was rewarded (as defined by the revenue and product plan shared with Wall Street analysts,) I understood why avoiding bad news and covering mistakes was the general manager’s rational choice in this company. Because earlier in my career I had a board that beat me senseless when I missed a milestone.

Cover-up Or Look Like an Idiot
In large companies executives are hired and compensated for pristine and efficient execution. If you screw up, there’s an unspoken assumption that you’ve screwed up a known process – something that was repeatable and predictable. You cover up because your screw-ups not only make you look like a failure, but everyone up the line (your boss, their boss, etc.) look like an idiot. Further, the odds are that the information you hide won’t immediately be discovered or damage the company.

I mention this not because this post is about cover-ups in large companies, (I’ll leave that to the experts in organizational behavior and social theory) but to contrast it with the very different kind of culture that startups need to survive.

The Cover-Up Culture: The Role of theBoardAs a founder I quickly learned how open I could be with my board. A few times I had not so great investors who believed that a startup should unfold like a Harvard case study. They ignored the reality that most startups are a chaotic set of events from which founders are trying to extract a repeatable and profitable pattern. The first time I delivered bad news I got my head handed to me. The lesson this chastened CEO took from that board meeting? Don’t tell this board bad news.

In other startups I was lucky and had great investors who knew how to manage and deal with chaos. They realized that conditions change so rapidly that the original business plan hypotheses becomes irrelevant. These investors taught me metrics appropriate forsearching for a business model, how to work with the board when I didn’t make a milestone, and how we would figure out when it was time to change the strategy. I thought of these board members as partners and I shared everything with them; good, bad and ugly.

These board members encouraged me to instill the right culture in the company. They reminded me that failures in startups tell the founders which direction not to pursue – while teaching you how to succeed. This means covering up failure in a startup was like tossing their money in the street. So instead of a cover-up culture they encouraged a “Lessons Learned culture.”

Startups: Good News Needs to Travel Fast, but Bad News Needs to Travel FasterA key element of a “Lessons Learned” culture is rapid dissemination of information. All information, whether good or bad, must be shared rapidly. We taught our company that understanding sales losses were more important than understanding sales wins; understanding why a competitor’s products were better was more important than rationalizing ways in which ours were superior. All news, but especially bad news, needed to be shared, dissected, understood, and acted on. At each weekly department and company meeting we discussedwhat worked and hadn’t. And when we found employees who hoarded information or covered up problems we removed them. They were cultural poison for a startup.

[…] This post was mentioned on Twitter by steve blank, The Network Hub, Alan Gleeson, bartezzini, Eric Mieras and others. Eric Mieras said: Never hide failure as mistakes are telling you where not to go: http://bit.ly/gE4cmO […]

“entire company had a “cover-up culture” – the CEO punished failure and bad news”, but that does not mean you can encourage failure, if you then people will tend to do more failure. But still I want my guys to report me the real facts. So how do develop such culture?

from the small amounts of psychology i’ve read, this type of behavior is learned at an early age. mostly from the relationship a child has with their parents. so ask potential new hires how their parents reacted when they made mistakes as a child. the same roles will play out in the workplace.

This one really resonated. Thanks for identifying this trait, which I’ll be looking out for in future (Happily our Directors don’t do this – that, or I simply haven’t ‘failed’ badly enough yet.)

I’d say a cover up culture is damaging for any size business, but a large corp may survive it for a length of time, while a start-up won’t. Of course when the impact is finally felt in large organizations, the fallout is spectactular, isn’t it.

I’ve often wondered myself what causes good people in large organizations (gov’t, corps, etc.) to lose sight of their moral compass and behave unethically. Some of my family have witnessed execs giving testimony under oath, blatantly lying to protect their company.

A good place to start building a corporate culture around ethics —- yup address lying, creative accounting, self-aggrandizement, etc- is to read Good Business: Leadership. Flow, and the Making of Meaning by Mihaly Csikszentmihalyi.

Time to put our virtues into action regardless of the size of your company.

The causes of a cover up culture are as complex as the factors effecting denial in a dysfunctional family.

A company leader who turns problems into opportunities makes it rewarding for employees to share challenges in a timely way. Hiring people with a track record of turning lemons into lemonade is also a way to overcome the cover up culture.

Importantly since no one can control everything any plan will encounter problems. How everyone copes with problems has a lot to do with success. As my husband recommends (who spent some time serving the auto industry) it is always better to hire someone who has experienced a car falling off the line.

I like these two from your learnings summary:
# Startups are built around rapid iterations of hypotheses. Most of them turn out be wrong
# Collectively analyze failures,then iterate, pivot and try again

Small sample size – one startup – but would emphasize need to rapidly iterate and both quantitatively and qualitatively understand each success and failure. Then iterate again and discover why your analysis was wrong but take half a step forwards in the process. Few more lessons here:

we cover up what we are ashamed to admit. and we are ashamed to admit that american society is way off course. has been for years. what should we do about it? let’s do something positive about it for a change.

I can really relate to what you are writing, but it needn’t always work out like that. I had a similar experience in product development and when the CEO chewed me out at the board meeting for “making him look bad”, I replied with a strategic response, laced with very blue language. The stunned look on the board members’ faces was priceless. I expected to be fired and waited. About three weeks later, the CEO was fired and I got to finish the project. No I didn’t get a promotion, nor a demotion. But the level I respect I got from the new CEO and the board after that episode made it easier to get projects done without interference and obstructions.

Hope my experience encourages others to be aggressive with the truth and not suck up, because it’s the done thing.

Thank you for your post, as it has provided me encouragement that there actually are companies (and hopefully government) that place value on ethical and truthful behavior, by “walking-the-talk”. I’m a senior accounting/auditing professional who has received extensive training from both Deloitte & PWC while working as the SOX Project Team Lead from 2003-2006. Subsequently, I took a job as a federal-aid compliance auditor for a State government agency in 2009. In 2010, prior to completing my 12 month probationary period, I was, in my opinion, wrongfully terminated. In fact, my supervisor admitted the reasons for my termination was a result of my having a “BIG PICTURE” approach (i.e., risk based approach) in performing my duties, attempting to develop time-consuming “AUTOMATED Processes/Forms” AND focusing on “FIXING PROBLEMS TOO QUICKLY” …..I’m still confused by the “WHY” and “HOW” this could happen in an environment where not only the State, but the whole US/World is in dire need of accountability and transparency. In my professional opinion, the “Cover UP” culture, in both the corporate world and government, is why the global economy is on the brink of total collapse.

Question: How can I identify potential employers that are “GOOD Corporate Citizens” and that reward their employees who refuse to compromise principals & values in performing their jobs?

You can start here learning more about the work of Jeff Klein. “Working for Good: Making a Difference While Making a Living, to support conscious entrepreneurs, intrapreneurs, leaders and change agents at work” Here’s the website. http://www.workingforgood.com/why-it-matters/

Really great post. It may be a little off-topic, but I hope you can include a reference (or two) in your talk next month at the Commonwealth Club. It’s such a critical piece to the culture of any startup (or entrepreneurial effort). See you there/then.

My previous startup I was CEO and I did everything in my power to be transparent. It backfired on me. I had investors that clearly did not get it. The Chairman of the Board (not me – an investor) took me once out to lunch and berated me even further when I explained to him I needed help deal with a specific issue that I was not capable of handling on my own. His attitude gave me a very clear hint of what turned out later to be reality. He wanted to manage the company from the board and replace me and my co-founder. This before we were even generating much revenue and still only 8 months into it… the rest is history. Thanks so much for educating everybody (not just entrepreneurs. I forward your posts to just about anyone these days🙂

A cover up culture is not only death to a startup, it is detrimental to any company. When I did turnarounds, one of the first things I would tell people is “you can surprise me with good news, but don’t ever withhold bad news.” And unfortunately, yes I did have to fire people who didn’t get the message to get it to stick with everyone else. Courage is a commodity in short supply in many companies and it starts with the CEO making it a safe place to dissent.

Excellent article, thank you for writing it!
I was wondering, do you think good and bad news should be shared with employees as well? Should a startup be completely transparent to all its stakeholders?
Thanks again,
Michalis

Yes! That’s like asking ‘when is cheating okay?” If you create a culture of trust — your employees will be there for you when you need them most — when times are tough! I might suggest reading:
Employees First, Customers Second: Turning Conventional Management Upside Down by Vineet Nayar

[…] they trust you to pay for it when it gets there.)” Steve Blank, serial entrepreneur, says don’t cover up problems: “All news, but especially bad news, needs to be shared, dissected, understood and […]

Thank you for another great article. I’m curious. Is it best to fire an employee right away for covering up, or to give them a warning first? Or does it depend on what line of the spectrum the cover up is on? How does one create a company that has just enough transparency to influence employees to be open and honest and not have managers jump down their throats?

Is there a culture of cover up at your company? Be honest? Is your leadership sending the message that cover up is okay. If so, why would you single out any one individual? I’m a firm believer in open book management — but even more so — the idea of managing with no manager. See Ricardo Semlar’s work. Or, Tony Hseih’s work at Zappos. When people know management has their back — they will respond!

[…] and this is the sort of behaviour that carries forward into the workplace. In many workplaces, those who are wrong are often punished or side-lined, whereas those who cast their weight in with the obvious consensus answer are the ones that […]